Image source: Getty Images
Investing in a Stocks and Shares ISA to create a passive income stream’s all well and good for those who have £20,000 a year to invest. But what about the majority of us who can spare a lot less?
Well, I don’t come close to the ISA limit each year, but I’ve still been using them since they were introduced.
How much is £5 a day? It’s not a lot when we look at the prices of things these days. Yet even a modest sum like that adds up to £1,825 a year (plus an extra fiver every leap year).
Shares to buy
I might not specifically pay £5 every day into my ISA, although it would be perfectly feasible to do that. No, I prefer to transfer some money every month and let it build that way. I’ll just make sure it comes to at least my daily £5 minimum.
But what will I actually buy? Over the decades, I’ve mostly gone for FTSE 100 shares that pay dividends. And I see no reason to change that.
So let’s take a look at one I bought a few years ago, Aviva (LSE: AV.). The insurance giant currently offers a forecast dividend yield of 7.5%, predicted to rise.
Buy what I know
I think it’s important to understand where the cash for my dividends comes from. Otherwise, I’d really just be guessing and gambling.
With Aviva, that’s life, accident and all kinds of general insurance coverage. And savings, pensions and investment services. Those are businesses that can generate strong cash flow.
But wait, isn’t insurance risky? Well, yes, some years insurers do have to pay out huge sums. And financial services can have bad years.
It’s also very competitive, and the Aviva share price has performed poorly in the past decade.
Compound dividends
But I still like the idea of my dividends compounding up over the years. They’re not guaranteed, and I expect to see lower yields from insurance stocks some years.
But 7.5% of £1,825 is £137 in a year (bar a few pennies). It might not sound like a lot, but it’s better than the £95 I could get from today’s very best Cash ISAs. And, though they’re guaranteed, Cash ISA rates will have to fall in response to Bank of England cuts.
Still, I don’t want the income yet, so I’d plough it back in with next year’s cash. Next year, I should start with £1,962 from which to earn 7.5% (in addition to next year’s £1,825), and so on. In fact, forecasts put the Aviva dividend yield at 8.4% in 2025.
Spread the cash
Aviva’s just one example, but it would be way too risky to put all my eggs in the insurance basket. I knew someone who had all their money in bank stocks just before the financial crash. That wasn’t nice.
In reality, I’d diversify across dividend stocks from a range of sectors. There are quite a few decent FTSE 100 dividends to choose from.
